Mercantilist Vs Adam Smith Theory

Adam Smith’s theories were innovative and revolutionary compared to the mercantilist’s ideals that were prevalent during that time. The prevailing concept was, in order to maintain a nation’s prosperity, it was imperative to keep all money within the nation because the wealth of a nation was the money in and of itself (Butler, 2011). Because of this belief, the colonies were not allowed to trade with other countries, which created monopolies within the country. As Britain continued to tax the colonies and did not allow them to have any representation, the colonists became discontent. They should have allowed them to have representation based upon what the colonists contributed to their economy. The reason something is produced is so it can be consumed, and the consumers’ interests should be met (Butler, 2011).
Smith was proposing that it was to the country’s benefit to trade with other nations. Furthermore, wealth was not just the money within the country, but also what it was able to produce and buy annually. We know it today as “the gross national product, or GNP” (Butler, 2011). What is being bought or exchanged is a person’s labor, and that is the wealth. Money is just the tool …show more content…
“Rent, wages, and profit” come together to make the natural price, or what is currently referred to as the “cost of production.” The natural price is the point at which a product is sold at a profit or loss (Butler, 2011). The law of supply and demand will determine the market price. When supply and demand match exactly, “the market clears” (Butler, 2011). When there is a surplus of a product and the price drops, the manufacturer will cut back on production to reduce their loss. As a result, quantity is less and the price will go up because the demand is greater than the supply. When manufacture of a product is profitable, production goes up and the prices will come down. This, again, clears the market (Butler,